Once you decide to invest in mutual funds, the next thing you must determine is the investment route. Mutual fund investment can be done in 2 ways. One is through SIP, which means to invest periodically. The other way is by a lump sum route. This piece discusses the second method to invest in mutual funds i.e., lump sum investment.
So, let’s start!
A lump sum means to invest a bulk amount in a single go. Note that the minimum amount in the case of lump sum investment in a mutual fund is usually Rs 5,000. Post the initial lump sum investment, investments in that scheme can be made in multiples of Rs. 1,000.
Now as the definition is clear, let’s concentrate on the investment strategies you must employ when opting for the lump sum route:
Factor in the P/E ratio for fund selection
One of the most crucial parameters as reference for a single shot allocation of your surplus funds is P/E or price per earnings ratio. As equity mutual funds are a collection of shares, examination of funds based on the P/E ratio is extremely useful. The P/E ratio is calculated by dividing the MPS (market price per share) of a stock by its EPS (earning per share). Suppose if stock X MPS is 500 and EPS is Rs 20, the P/E ratio will be (500/20) = 25. This means stock X is trading at 25 times earnings.
A mutual fund’s P/E ratio is the weighted average P/E of all stocks in the fund. Weights of stocks are decided as per the market values. For instance, assume, a mutual fund contains stocks of XY ltd. worth Rs 4 lakh and RL ltd. worth Rs 6 lakh, the overall fund value is Rs 10 lakh and the weight of XY ltd stock is 40 percent, and RL Ltd’s 60 percent. If the P/E ratio of the stock XY is 14 and stock RL is 11, then, the fund’s P/E ratio will be (0.40X14 + 0.60 X 11) = 12.20.
From an investment viewpoint, a lower P/E is recommended. Lump sum investment is best when markets are low so that you can gain when the market begins to improve.
Time your investment
Whether you invest in mutual fund online or offline, it is important for you to wait for the right opportunity to make a lump sum investment to earn maximum returns. The best time to make a lump sum investment in a mutual fund is when the net asset value (NAV) of the fund is at its low and there are chances to gain during an upturn market movement. Investing when NAVs are low, allows you to procure higher units of funds. This offers you a broader base for generating higher earnings when the scheme makes an upward movement.
Your purpose to make a lumpsum investment must be to attain your crucial financial goals. Aligning your lump sum investment with a crucial financial goal assists you to determine how much you must invest, what mutual fund category you must choose, and for what investment horizon you must stay invested. If your investment is short term, it is best you invest in liquid funds as they are exposed to low risk and allow quick redemption. Investment in balanced funds is advised for mid-term goals. And in the case of long-term goals, equity funds are a fruitful option. Likewise, if your goal is to save tax, an ELSS mutual fund is the best option. However, note that it comes with a lock-in of three years.
Review your investments periodically
Once you have invested your funds in a mutual fund through the lumpsum route, ensure to identify any underperformance and correct any deviations in the asset mix of your portfolio. Redeem those funds that have constantly been underperforming their peers and benchmark over the past three years for a better performing fund.